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NOTE A - SUMMARY OF ACCOUNTING POLICIES
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6 Months Ended |
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Jun. 30, 2011
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| Significant Accounting Policies [Text Block] |
NOTE
A - SUMMARY OF ACCOUNTING POLICIES
A
summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial
statements follows.
General
The
accompanying unaudited condensed consolidated financial
statements of Telkonet, Inc. (the “Company”) have
been prepared in accordance with Rule S-X of the Securities
and Exchange Commission (the “SEC”) and with the
instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements.
In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. However, the
results from operations for the three and six month periods
ended June 30, 2011, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2011. The unaudited condensed consolidated
financial statements should be read in conjunction with the
consolidated December 31, 2010 financial statements and
footnotes thereto included in the Company's Form 10-K filed
with the SEC.
Business
and Basis of Presentation
Telkonet,
Inc., formed in 1999 and incorporated under the laws of the
state of Utah, has evolved into a Clean Technology company
that develops, manufactures and sells proprietary energy
efficiency and SmartGrid networking technology. Prior to
January 1, 2007, the Company was primarily engaged in the
business of developing, producing and marketing proprietary
equipment enabling the transmission of voice and data
communications over a building’s internal electrical
wiring.
In
March 2007, the Company acquired substantially all of the
assets of Smart Systems International (SSI), a leading
provider of energy management products and solutions to
customers in the United States and Canada.
In
March 2007, the Company acquired 100% of the outstanding
membership units of EthoStream, LLC, a network solutions
integration company that offers installation, sales and
service to the hospitality industry. The EthoStream
acquisition enabled Telkonet to provide installation and
support for PLC products and third party applications to
customers across North America.
In
March 2011, the Company sold all its Series 5 PLC product
line assets to Wisconsin-based Dynamic Ratings, Inc. under an
Asset Purchase Agreement.
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Telkonet
Communications, Inc., and EthoStream, LLC. Significant
intercompany transactions have been eliminated in
consolidation.
Going
Concern
The
accompanying condensed consolidated financial statements have
been prepared in conformity with accounting principles
generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern.
The Company has reported net income from continuing
operations of $1,095,667 for the six month period
ended June 30, 2011, accumulated deficit of $114,417,686
and total current liabilities in excess of current assets of
$167,576 as of June 30, 2011.
Concurrent
with the first quarter debenture retirement, the second
quarter equity raise and our year to date operating results,
the Company believes anticipated revenues and its’
continued operational efficiencies will be sufficient to
satisfy its ongoing capital and cash flow requirements
for the remainder of fiscal 2011. However,
the Company also believes there remains sufficient
uncertainty, both in the economic environment and our current
deficit position, that the Company cannot make any
representations for
fiscal 2012.
Fair Value of Financial Instruments
The
company accounts for the fair value of financial instruments
in accordance with ASC 820, which defines fair value for
accounting purposes, established a framework for measuring
fair value and expand disclosure requirements regarding fair
value measurements. Fair value is defined as an
exit price, which is the price that would be received upon
sale of an asset or paid upon transfer of a liability in an
orderly transaction between market participants at the
measurement date. The degree of judgment utilized
in measuring the fair value of assets and liabilities
generally correlates to the level of pricing
observability. Financial assets and liabilities
with readily available, actively quoted prices or for which
fair value can be measured from actively quoted prices in
active markets generally have more pricing observability and
require less judgment in measuring fair
value. Conversely, financial assets and
liabilities that are rarely traded or not quoted have less
price observability and are generally measured at fair value
using valuation models that require more
judgment. These valuation techniques involve some
level of management estimation and judgment, the degree of
which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or
liability. We have categorized our financial
assets and liabilities that are recurring, at fair value into
a three-level hierarchy in accordance with these
provisions.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the cost of businesses acquired over
fair value or net identifiable assets at the date of
acquisition. Goodwill is subject to a periodic
impairment assessment by applying a fair value test based
upon a two-step method. The first step of the
process compares the fair value of the reporting unit with
the carrying value of the reporting unit, including any
goodwill. We utilize a discounted cash flow
valuation methodology to determine the fair value of the
reporting unit. If the fair value of the reporting
unit exceeds the carrying amount of the reporting unit,
goodwill is deemed not to be impaired in which case the
second step in the process is unnecessary. If the
carrying amount exceeds fair value, we perform the second
step to measure the amount of impairment loss. Any
impairment loss is measured by comparing the implied fair
value of goodwill with the carrying amount of goodwill at the
reporting unit, with the excess of the carrying amount over
the fair value recognized as an impairment loss.
Long-Lived
Assets
We
review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with ASC
360-10. Recoverability is measured by comparison of the
carrying amount to the future net cash flows which the assets
are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the projected discounted future cash flows
arising from the asset using a discount rate determined by
management to be commensurate with the risk inherent to our
current business model.
Income
per Common Share
The
Company computes earnings per share under ASC 260-10,
Earnings Per Share. Basic net income per common share
is computed by dividing net income (loss) by the weighted
average number of shares of common stock. Diluted
earnings per share is computed using the weighted average
number of common and common stock equivalent shares
outstanding during the period. There is no effect on
diluted income per share since the common stock equivalents
are anti-dilutive. Dilutive common stock equivalents
consist of shares issuable the exercise of the Company's
stock options and warrants.
Use of
Estimates
The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC
740-10 “Income Taxes.” Under this method,
deferred taxes (when required) are provided based on the
difference between the financial reporting and income tax
bases of assets and liabilities and net operating losses at
the statutory rates enacted for future periods. The Company
has a policy of establishing a valuation allowance when it is
more likely than not that the Company will not realize the
benefits of its deferred tax assets in the future.
The
Company has adopted the Financial Accounting
Standards Board (“FASB”) issued ASC 740-10-25,
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken
in a tax return. ASC 740-10-25 also provides guidance on
derecognition, classification, treatment of interest and
penalties, and disclosure of such positions.
Revenue
Recognition
For
revenue from product sales, we recognize revenue in
accordance with ASC 605-10, and ASC Topic 13 guidelines that
require that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is
fixed and determinable; and (4) collectability is reasonably
assured. Determination of criteria (3) and (4) are
based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and
the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the
same period the related sales are recorded. We
defer any revenue for which the product has not been
delivered or is subject to refund until such time that we and
the customer jointly determine that the product has been
delivered or no refund will be required. The
guidelines also address the accounting for arrangements that
may involve the delivery or performance of multiple products,
services and/or rights to use assets.
Stock
Based Compensation
We
account for our stock based awards in accordance with ASC
718-10, Compensation, which requires a fair value measurement
and recognition of compensation expense for all share-based
payment awards made to our employees and directors, including
employee stock options and restricted stock awards. We
estimate the fair value of stock options granted using the
Black-Scholes valuation model. This model requires us to make
estimates and assumptions including, among other things,
estimates regarding the length of time an employee will
retain vested stock options before exercising them, the
estimated volatility of our common stock price and the number
of options that will be forfeited prior to vesting. The fair
value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally
the vesting period. Changes in these estimates and
assumptions can materially affect the determination of the
fair value of stock-based compensation and consequently, the
related amount recognized in our consolidated statements of
operations.
The
expected term of the options represents the estimated period
of time until exercise and is based on historical experience
of similar awards, giving consideration to the contractual
terms, vesting schedules and expectations of future employee
behavior. For 2011 and prior years, expected stock price
volatility is based on the historical volatility of the
Company’s stock for the related vesting periods.
Stock-based
compensation expense in connection with options granted to
employees for the six months ended June 30, 2011 and 2010 was
$15,988 and $88,181, respectively.
Deferred
Lease Liability
Rent
expense is recorded on a straight-line basis over the term of
the lease. Rent escalations and rent abatement periods during
the term of the lease create a deferred lease liability which
represents the excess of cumulative rent expense recorded to
date over the actual rent paid to date.
Reclassifications
Certain
reclassifications have been made in prior year's financial
statements to conform to classifications used in the current
year.
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